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Timing Disruption: The Stepping Stone Strategy

13 July 2018

There are times when everything changes in business – when this happens it is often sudden, surprising and sometimes overwhelming. These moments are the strategic inflection points that can result in a company rocketing to success or being left behind. An inflection point represents an event that leads to the major assumptions underlying a business to change, in which its operating model is challenged. This happened to American tech firm, Rand McNally, which overlooked the ‘greatest opportunity in mapping since the spice trade’ as one observer put it. Despite vast knowledge of road systems and an iconic brand, Rand McNally simply missed the transition to digital mapping, first on the Internet and subsequently on smartphones. In other cases, an inflection point can make a category obsolete, as is increasingly the case with the smartphone revolution and digital/film-based cameras.

Remaining negative and deliberately ignorant towards change, particularly in business, is counter-productive. Instead, significant opportunities can be opened by smartly navigating inflection points in rapidly changing and uncertain contexts.

Identifying an inflection point in the making: The Case of HarperCollins

Brian Murray, CEO of HarperCollins publishing, speaking in January of 2017:

"A lot has happened in the industry in the 20 years I’ve been with HarperCollins. Probably the first memory of when I realised that something big was happening was at the Frankfurt Book Fair. It was 2004 or 2005 when Larry and Sergey came out to the Frankfurt Book Fair, the largest international book fair in the world, because they were beginning to try to figure out what to do with books and search engines. They met with all the publishers. Here were these two young kids that came in, and they had a dissertation on index cards or something, and here we were. People were just starting to use Google at the time.

And all of a sudden, I realised that there was a sea change that was going to happen. I didn’t know how it was going to unfold, but that was one crystal clear memory… I don’t think our economy, our country, and corporations understand the impact of digital economics. Once you go to zero variable costs, everything changes. And so books, of all the media, being the smallest file that exists and the easiest to transmit, even at that time, you could see that there was going to be a fundamental shift in the business for book publishers…. how can we survive and thrive as those ecosystems were being built up around us?"

What Murray is describing in this conversation, is the crystallisation of insight that something is going to dramatically change your world.

An inflection point occurs when a change – what some people call a 10X change – upends the assumptions that a business is built on. In this case, it was the recognition that publishing was going to look a lot like software, in which the cost to create something happens up front, but the cost of replicating it once it has been built is more or less zero. As we shall see, there is often a long and winding path before that compelling “Aha” emerges.

Keeping Your Head During the Gold Rush

We only need look at the winding path of the internet which changed retail forever. In 1995, when Amazon shipped its first book, observers said the retail environment would be transformed in short order. Consumers would buy anything and everything and enjoy the convenience of having it shipped to their doorsteps. Retailers, heeding the early warnings of their impending doom, rushed into buying .com addresses, setting up web pages, building banner ads and otherwise trying to capture the opportunity this potential inflection point offered. This is what AOL founder, Steve Case, refers to as the “hype” phase.

Cast your mind back to the Internet of 1995. Only 40% of US households even owned a computer. Access to the Internet was via dial-up modem. People didn’t know how to pay for things. The shipping costs for an Internet good could be more expensive than the item itself. In short, there were a lot of missing pieces to the model.

Sadly, a lot of the early retail experimenters drew the wrong conclusion – namely, that this Internet thing was just an overhyped technology. They went back to trying to beat each other up with discounts, sales and coupons and business returned to what they saw as “normal.” There was just one problem – the inflection point was real. High-speed, always-connected modems improved the online experience. The ecosystem for ordering, payments and shipping fell into place. Now, conventional retail is in full-scale retreat.

By the time Murray had his flash of insight, a decade had passed. The Internet had gone from being a frustrating, disorganised, chaotic place to somewhere where people turned to for useful information (Yahoo), to clean out their closets (eBay), to use email (AOL), to connect with others in their local community (Craigslist) and to buy things (Amazon).

As he assumed the role of CEO in 2008, Murray advanced a strategy that has led to a digital transformation of the 200-year old bookseller. At its core was a strong belief that the single most differentiating quality that a book publisher could have, relative to other digital competitors, was its close ties to authors. As Murray says, “there was no way that with Amazon and Google in the mix that we could win the consumer – engaging with authors then became core to our strategy.”

This core decision has fueled substantial growth at the publisher, by taking advantage of the opportunities presented by the digital revolution. It made acquisitions of popular properties such as Harlequin books. It diversified into foreign languages. It launched its own direct-to-consumer web sites, such as www.cslewis.com and www.Narnia.com to create a direct connection between readers and authors that coincidentally reduced their dependence on Amazon. More recently, HarperCollins has succeeded with books aimed at Middle America, leveraging inland offices and editors who don’t live in the coastal bubble states.

The Stepping-Stone Strategy

In the case of HarperCollins, the advance of digital (as we’ve seen) was not instantaneous, but it was used to inform a series of path-dependent strategic choices, much of which have their touchstones in connecting authors and readers more deeply, such as HC’s own reading app. The company did not, however, leap boldly into the Internet in the heady, hazy bubble days. The signals that digital had without a doubt arrived were very strong by the time of Murray’s fateful meeting at the Frankfurt Book Fair. At that stage, bold action makes sense.

"Stepping-stones are investments made when both technological uncertainty and market uncertainty is very high."

In short, just as the ecosystem for internet retail in 1995 was incomplete, it doesn’t mean that if you are in the traditional business sector, you shouldn’t be paying attention – of course you should. It does mean, however, that you need to be careful about making major, irreversible investments under such a high degree of uncertainty. To proceed in such situations, what I call a stepping-stone strategy makes a lot of sense.

Stepping-stones are investments made when both technological uncertainty and market uncertainty is very high. Technological uncertainty involves not only whether a given technology works at all, but also affects the constellation of legal, regulatory, standards and institutional agreements necessary for a technology to be launched. Market uncertainty involves the extent to which end customers will pay for a solution to a problem, how much they will pay, what channel they will use and so on. That’s where autonomous vehicles are now.

"The stepping-stone strategy allows a firm to open options for the future in a way that generates modest, but ideally profitable, growth, helps to build an ecosystem, and makes the reality of the future more tangible. "

What you don’t want is to do nothing. That is the business equivalent of leaving yourself with no options at all, with a looming substantial inflection point just around the corner. You also don’t want to over-invest. The stepping-stone response is to find a segment of the market that can benefit from deployment of the new technology (or solution) as it exists right now, to address a pressing and costly problem that customers are keenly aware of, and yet for which no alternative solution exists. The stepping stone metaphor is deliberate – what you are looking for is a market that is perhaps not your ultimate target market, but rather allows you to take a step toward that market, building acceptance and an ecosystem along the way.

Strategic inflection points can indeed create swathes of creative destruction in their wake as old business models and technologies are rendered obsolete. However, moving too aggressively in the over-hyped early stages can lead to heartache. The stepping-stone strategy allows a firm to open options for the future in a way that generates modest, but ideally profitable, growth, helps to build an ecosystem, and makes the reality of the future more tangible.

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